China Tech

See important disclosures, including any required research certifications, beginning on page 6

Background Top-3 hardware player in China. Xiaomi is a privately owned company that designs, develops and sells its own brandqwe2 of consumer-electronics items via the Internet. In its recent fundraising, Xiaomis implied enterprise value (EV) was USD10bn, putting it among the top-three largest hardware makers in China on this measure (together with Lenovo [992 HK, HKD8.15, Buy (1)], with a market cap of USD11bn, and Huawei [Not listed]). On the same basis, Xiaomi is the fourth-largest smartphone maker globally with an enterprise value of USD10bn (Nokia [USD25bn market cap], Lenovo [USD11bn], Huawei [market cap not available, but widely thought to be a top-3 player], Blackberry [USD4.6bn], and HTC [USD3.9bn]).

Highlights New products. With its recent launch of the Mi3 smartphone and Red Rice (Hongmi) low-cost smartphone, Xiaomi has signalled its intention to become a leading smartphone maker in China. Ambitions to become a global player. Xiaomi recently hired ex-Google top management/product director Hugo Barra to lead its global division, with a view to expanding its global business and strengthening its ties with the US company. Xiaomi expects Barra to be instrumental in helping to expand its presence overseas, and join the ranks of the big multinational players. Business model includes hardware, software/content, and social networking, backed by MIUI operating system. Xiaomi aims to provide a refined user interface (UI) for Android smartphone users through its MIUI platform (launched in 2010), which provides a weekly stream of updates that encourage close interaction between the company and the sizable base of users of its products. Xiaomi thinks MIUI has set a precedent for the potential success of its app, content, service, community service businesses. Xiaomi is seen as Chinas answer to Apple. Xiaomi is widely viewed in China as attempting to build up its brand as the countrys answer to Apple, with its unique operating system (MIUI), positive

buzz among the young generation, and marketing acumen. The company often sees a shortage of its smartphones, selling out its new models online within five minutes of launch. Internet sell-through also brings cost efficiencies, given the lack of retail marketing costs. Indeed, a shortage of its Hongmi smartphone pushed up the second-hand price on-line to CNY1,000, from an original price of CNY799. Xiaomi is competitive on price/ performance. 1) Xiaomi tries to provide similar specs to those of Apple smartphones (even using Apples component suppliers) but at a much lower price for online sales, with profits expected to come through later in the products life cycle. Its Mi1/Mi2/Mi3 models have similar specs to Apples iPhones but are priced at CNY1,999 (compared with over CNY3,300 for the equivalent Apple product). 2) This year, Xiaomi has been tapping the local supply chain as well as Apples component suppliers. Its Hongmi smartphone, priced at CNY799, leverages Mediateks solutions as well as components sourced from China-based players. Valuation We reaffirm our Buy rating on Mediatek (2454 TT, TWD371.50, Buy [1]), as we believe it will retain its market dominance in semiconductors and in terms of its market share of China smartphone-IC shipments, with key China smartphone makers leveraging its product offerings.

25 September 2013

Xiaomi: Chinas answer to Apple

Xiaomi seems to be fashioning an Apple-like image, backed by its Android-based MIUI platform

The company, by some measures the fourth-largest smartphone maker globally, is targeting shipments of 20m-plus units this year

As well as using Apples component suppliers, it is increasingly leveraging the domestic supply chain and Mediateks solutions

China Tech Food Chain

Information Technology / China

Eric Chen(852) 2773 [email protected]

Kylie Huang(886) 2 8758 [email protected]

Lynn Cheng(886) 2 8758 [email protected]

China Tech Food Chain 25 September 2013

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Chinas answer to Apple

Targeting 20m-plus unit shipments this year

Aiming for 200%-plus YoY shipment growth. The company expects its smartphone shipments to reach 20m units in 2013 (7m shipped in 1H13), up from 7m in 2012. Such a level would imply around 200% YoY shipment growth for 2013, vs. our expectations in the market for 80-100% YoY growth for the industry. In 1H13, the company posted revenue of CNY13.3bn, higher than its full-year 2012 revenue of CNY12.6bn. Shipment trends for Chinas top-10 players (m units) 2011 2012 2013E 2014E Huawei 15 33 45 60 ZTE 14 27 40 52 Lenovo 5 28 40 60 Coolpad 9 15 25 35 TCL Communication 3 12 20 35 Xiaomi 1 7 20 40 Gionee 2 12 18 26 OPPO 2 7 13 23 BBK 1 5 12 20 Tianyu 1 5 10 16Top-10 players shipments 53 151 243 367Total China smartphone shipments 64 240 430 615Top-10 players shipment share (%) 83 63 57 60Source: Companies for historical numbers and 2013 forecasts, Daiwa forecasts

The companys strong smartphone sales-volume growth in 2013 comes as the profile of its brand in China continues to rise and is supported by the launch of its low-cost smartphone (the Red Rice [Hongmi]).

Xiaomi tries to provide similar specs to those of Apple smartphones (even using Apples component suppliers) but at a much lower price. Bill of materials: Xiaomi vs. iPhone

iPhone 5 Xiaomi Red Rice

(Hongmi) Xiaomi Mi1 Global launch 4Q12 Aug-13 4Q11 1. Application Processor 17.5 (A6) 16.8 (MT6589T quad-core 1.5GHz)

10 (Qcom 8260 dual-core 1.5GHz)

2. Display (Module+Touch) 44 (4", Retina Display, In-cell) 27 (4.7") 35 (4")

3. Memory 20.85 (Flash: NAND,

16GB, RAM: 1GB)

11.2 (1GB RAM, 4GB storage)

22 (1GB RAM, 4GB storage)

4. Mechanical/E-Mechanical (Glass & Metals, PCB...etc) 33 3.3 20 5. Battery (3.7V) 4.5 (3.8V) 3.8 5 6. Bluetooth/ WLAN 5 (Murata Dual-Band Wireless Module) 1.2 8 7. Camera 18 (8MP/1.2MP) 8.8 (8MP/1.3MP) 12 (8MP)

8. Baseband / RF / PA 34 (QCOM

MDM9615M / RTR8600)

9.3 20

9. User interface (Sensors) 6.5 4 10. Power management IC 8.5 2 11. Box content 7 1.3 8 Total materials 199.85 82.7 151 Estimated manufacturing cost 8 2 9 BOM cost 207.85 84.7 160 Shipment price for operator 650 130 180 Source: Daiwa estimates

The Hongmi model is all about China Having initially favoured Apples component suppliers, Xiaomi is now building up its local supply chain. For OEM work it uses Wingtech for its TD-SCDMA offerings and Longcheer for WCDMA offerings. Its recently launched low-cost Hongmi sports Mediateks quad-core MT6589T processor (1.5GHz), together with a 4.7 display, and is priced at CNY799. The higher-end Mi3 model is powered by a Qualcomm 800 series (MSM 8974 AB) quad-core processor, and has a 5 display and 16GB RAM. It is priced at CNY1,999.

Specs for new China smartphones vs. global smartphones

Xiaomi Xiaomi Sony Apple Apple SECModel Mi3 Red Rice (Hongmi) Xperia Z1 iPhone5S iPhone5C Galaxy Note 3Global launch 13-Sep 13-Aug 13-Sep 13-Sep 13-Sep 13-SepNetwork WCDMA/TD-SCDMA/CDMA TD-SCDMA (Planned WCDMA) LTE/WCDMA

WCDMA/CDMA/FDD-LTE/TD-LTE

WCDMA/CDMA/FDD-LTE/TD-LTE LTE/WCDMA

OS MIUI V5/Android 4.2.1 MIUI V5/Android 4.2.1 Android 4.2.2 iOS7 iOS7 Android 4.3Display 5.0" 4.7" 5.0" 4.0" 4.0" 5.7"Resolution 1920*1080 (HD 441ppi) 1280*720 (HD720 312ppi) 1920*1080 (HD 441ppi) 1136*640 (Retina 326 ppi) 1136*640 (Retina 326 ppi) 1920*1080 (HD 386ppi)

Processor TD/WCDMA: Nvidia Tegra4 CA-15

quad-core 1.8GHz WCDMA: Qualcomm800

MSM8974AB quad-core 2.3GHz

MT6589T CA7 quad-core 1.5GHz

Qualcomm800 MSM8974 quad-core 2.2GHz Apple A7 Dual-core 1.6GHz Apple A6 Dual-core 1.3GHz

LTE: 2.3GHz Qualcomm quad-core

3G: 1.9GHz Exynos 5 quad-core*2 (CA15 1.9GHz+CA7

1.3GHz) Memory-storage 16/64GB 4GB 16GB 16/32/64GB 16/32GB 32/64GBMemory-RAM 2GB 1GB 2GB 2GB 1GB 3GBWeight 145g 158g 170g 112g 132g 168gThickness 8.1mm 9.9mm 8.5mm 7.6mm 8.97mm 8.3mm

Camera Rear: 13MP Rear: 8MP Rear: 20.7MP Rear: 8MP Rear: 8MP Rear: 13MPFront: 2MP Front: 1.3MP Front: 2MP Front: 1.2MP Front: 1.2MP Front: 2MPPricing CNY1,999(16GB)/ CNY2499 (64GB) CNY799 USD935 USD649/USD749/USD849 USD549/USD649 USD700 (32GB)

Source: Companies, Daiwa


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Thinking differently According to the company, the growth in its business in recent years has largely flowed from its progress in the smartphone space, most notably from its moves to broaden its ecosystem. There are several ways Xiaomi seeks to stand out from other handset makers:

It emphasises mobile content its MIUI OS is updated every week and has several functions specifically tailored to China-based consumers, including its own app store.

It has an Internet-centric business Xiaomi has built up customer recognition of its products through Internet-based promotion, which keeps down costs while encouraging direct interaction with users. It also keeps costs in check through a shipment-by-order model (B2C).

It aims to deliver high-spec products at low prices the idea is that the specs of the model sustain consumer interest until the bill of materials falls, paving the way for profitability in the later stages of the products life cycle to offset losses incurred in the initial stages.

With margins on hardware manufacturing declining, Xiaomi seeks to add value through its focus on content service/usage its customised UI and self-developed or co-developed mobile apps/platforms have boosted consumer awareness of the company and its products, allowing it to develop its own

distinct user community, rather than one considered part of the larger Android/Google platform.

Buy Mediatek We believe China smartphone makers will be able to narrow the technology gap with the global brands in terms of performance by using Mediateks octo-core MT6592. In our view, the MT6592 should help China smartphone makers gain access to the mid-range and high-end largescreen (4.8-6) smartphone segments, as well as help Mediatek receive more orders globally. At the same time, we see Mediatek expanding its portfolio of quad-core smartphone ICs to a wide range of segments. We continue to expect the company to have a dominant share of the quad-core smartphone-IC market in China in 2014. For 3Q13, we forecast Mediateks smartphone-IC shipments in China to be 64m units (20m, 22m, and 22m units for each month), up from 51m units for 2Q13, representing a 25% QoQ rise. Overall, we forecast China smartphone shipments to rise by a high-teen percentage QoQ for 3Q13. We expect the share price to be supported by a YoY rise in 2014 EPS. We reiterate our Buy (1) rating and six-month target price of TWD430 (based on an unchanged 20x PER applied to the 12-month forward EPS). The main risk to our view would be lower-than-expected 2013-15 smartphone-IC shipments.


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Daiwas Asia Pacific Research Directory

Daiwas Asia Pacific Research Directory

HONG KONG Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research; Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Hui MIAO (852) 2848 4464 [email protected] Macro Economics (China)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)

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Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan)/Diversified Financials (Taiwan and China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China)

Winston CAO (852) 2848 4469 [email protected] Capital Goods Machinery (China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

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PHILIPPINES Rommel RODRIGO (63) 2 813 7344

ext 302 [email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

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Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Joshua OH (82) 2 787 9176 [email protected] IT/Electronics (Handset Components)

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TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Lynn CHENG (886) 2 8758 6253 [email protected] IT/Electronics (Semiconductor)

INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)


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Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the Securities), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.


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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europes affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparers views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMAs views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMAs non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For Ownership of Securities information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For Investment Banking Relationships please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For DCMA Market Making please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on Research Analyst Conflicts please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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